mis

THE INDIAN INSTITUTE OF BUSINESS MANAGEMENT AND STUDIES

SUB: MIS MAX MARKS: 100

Case I

Morgan Stanley’s Return on System Non-investment

Morgan Stanley is global financial services firm with more than 600 offices in 30

countries and over 53,000 employees. It was founded in 1935 and is headquartered in New

York City. The firm operates in four segments: Institutional Securities, Asset Management,

Retails Brokerage, and Discover (which provides Discover Card services.) The firm acquired the

Discover Card business as a result of its merger with retails brokerage dean Witter discover

and Co. in 1997.

The unification of Morgan Stanley and Dean Witter created a digital, cultural, and

philosophical divide, which was extremely difficult to overcome. One of the business sectors to

suffer the most under this arrangement has been Retail Brokerage, which manages $616

billion in client assets. Retail Brokerage provides comprehensive brokerage, investment, and

financial services to individual investors globally, with 9,526 worldwide representatives in more

than 500 retail locations, including 485 in the United States.

Despite the merger, the Retail Brokerage group was never accepted as an equal

partner by the rest of Morgan Stanley. Former Dean Witter employees have claimed they felt

like disrespected outsiders after the merger. The feeling persisted and many retail brokers

viewed their job security as tenuous at best.

Moreover, Retail Brokerage was not well-integrated with the rest of the company. It ran

on a different systems platform than the institutional brokerage side, and its employee

systems were not integrated.

Retail Brokerage systems were also much more antiquated than those at other parts of

the company.

Brokers have to visit their offices on weekends to print portfolio summaries in advance

of client meetings, because the outdated computer systems could not handle the task during

normal business hours. Even on those off-hours, desktop PCs, which hadn't been upgraded in

years, would often crash and printers clogged if they were being used by more than two

people. Brokers did their work without benefit of an application that provided both real-time

stock quotes and transaction histories. Some of the firm's technology problems couldn't be

hidden from clients, who routinely complained about the customer Web site and sparsely

detailed year-end tax reports they received.

Top brokers started to leave, taking with them the portfolios of numerous important

clients. Profits specifically from Retail Brokerage dropped precipitously and margins lagged

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behind those of comparable brokerage firms. During this time, nearly 1,500 brokers left the

company. Bill Doyle, an analyst with Forrester Research Inc., pointed out that the business was

ailing partially as a result of lack of investment in technology.

When the stock market crashed in 2001, CEO Philip Purcell believed that the market's

comeback would happen slowly. He therefore focused his business strategy on maximizing

profits instead of generating revenue. The implementation of this strategy involved cutting

costs. Each of Morgan Stanley's divisions received less funding for their operations, jobs were

eliminated, and investing in technology was obviously a low priority. Purcell, of course, had

miscalculated. The market rebounded within a few years, and Morgan Stanley was not

positioned to compete in retail. While his firm was watching its margins, Merrill Lynch was

spending $1 billion on new systems for its brokers. The turmoil in the inner sanctum of Morgan

Stanley's leadership also contributed to the company's woes.

Purcell locked horns with investors, executives, and former executives over a number of

issues, one of which was selling the underperforming Discover credit card division. Some

investors even wanted Purcell to spin off the entire Dean Witter part of the company. In March

2005, eight former executives appealed to Morgan Stanley's board of directors to remove

Purcell as CEO for his mismanagement of Discover and Retail Brokerage. The board

determined that the best interest of the firm was served by keeping Purcell and divesting itself

of its struggling divisions. The board also approved Purcell's appointments of two executives

who were considered loyal to him and to the board.

Protesting Purcell's leadership, two leading executive sin the investment banking

division resigned. More departures followed. Purcell's critics now had even more ammunition

with which to bring him down: in addition to mismanaging the struggling areas of the business,

his action has threatened the performance of the firm's strength, investment banking. Purcell

finally resigned in June 2005, unable to shake the claims that his solutions to problems were

lightweight rather than dramatic and far-reaching, and that his decision were based on

protection his job rather than improving the firm. He was succeeded by John Mack, a former

Morgan Stanley president who had left the company in 2001. As a result of a power struggle

with Purcell.

With new leadership in place, Morgan Stanley has finally begun to address the issue of

technology in its Retail Brokerage division, which has been renamed the Global Wealth

Management group. In October 2005, the firm hired Eileen Murray as its head of Global

Operation and Technology. She works directly under Chief Executive John Mack, with whom

she has a strong professional history. Murray has committed to boosting Morgan Stanley's

investment in technology for retail, saying, "We expect to make substantial improvements"

that " will ultimately help our financial advisors better serve our clients while also helping our

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clients better manage their relationship with us". As proof, the technology and operations

budget for the Global Wealth Management Group for 2006 exceeded $500 million. Mack also

brought in a new boss for the group. It is now under the leadership of James Gorman, who

performed a successful parallel makeover at Merrill Lynch's brokerage division.

Mack has been under some pressure to sell the retail division, a choice he has been

reluctant to make. He subscribes to the view that ownership of a retail brokerage business is

an investment in the firm because, in addition to providing revenue from individual investors, it

gives Morgan Stanley a direct channel for selling its own investment banking products. Mack's

goal is to increase the profit margin of the Global Wealth Management Group retail brokerage,

which ranges from 11 percent to 20 percent, which would make it as profitable as rivals'

businesses.

Mack has stated both publicity and privately that some of Morgan Stanley's businesses

had not received the technology they needed, and he intends to make the necessary

investments. In the firm's 2005 annual report, Mack said, "We are committed to addressing

underinvestment," and "We're going to upgrade our technology platforms and provide our

financial advisors and investment representatives with a tool kit that is an competitive as that

of our leading peers."

Some of the overwhelmed broker desktop workstations have been replaced. The new

systems are better integrated with backend systems so that brokers have been replaced. The

new systems are better integrated with backend systems so that brokers have a better view of

client portfolios. The company plans further improvements in their are so that brokers will have

access to all relevant client data at once including transaction history, contact history, and

portfolio performance. Consolidating all of these features will require several years of work.

The company also rolled out a new tax-reporting application that automatically reconciles

gains and losses and allows users to download information from its client Web site into popular

tax programs. Before that time, customers had to wade thought a confusing maze of figures to

add up gains and losses on their year-end tax reports.

In response to customer demands, Morgan Stanley scheduled an upgrade of its Web

site for May 2006, which analyst Doyle described as a particularly weak area for the firm. The

services available online to Morgan Stanley customers dated back to pre-2000 technology.

Doyle sees the Web presence as a major challenge because Morgan Stanley has been focusing

more on its wealthiest clients than on the rank-and-file small investors. The firm had previously

assumed that these top clients weren't interested in online services because they get the

direct attention of brokers (whereas investors with portfolios under $100,000 must deal with

call centers). Research by Forrester has shown the opposite to be true: wealthy customers

actually want more hands - on control of their portfolios, and therefore want more tools and

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services available online. These customers prefer to approach their brokers with their own

ideas. Gorman, as head of the significance that online technology holds for his division.

Mack and Gorman must also take measures to repair the schism that developed after

the merger with Dean Witter. Mack has been addressing the issue of a "one-firm culture." The

firm is trying to stem the loss of productive brokers. Increasing salaries and expense accounts

are not enough. The top brokers still fell they can fulfill their earning potential better and hold

hobs longer at other firms. It's not just that their print queue gets jammed; it's that they

question how much the company values them if it's not willing to support them in such a way

that they can best perform their jobs.

By the spring of 2006, sings of progress were evident. In June 2006, Morgan Stanley

generated second-quarter net income of $1.96 billion. The retail brokerage division posted

$157 million in pretax profit, the largest profit since the first quarter of 2005.

CASE I QUESTIONS:

1. Why did Morgan Stanley under invest in information technology?

2. Why was the merger with Dean Witter disruptive for the company?

3. If you were James Gorman, the new head of Global Wealth Management Group, What

information systems would you invest in ? Why? Do you think Morgan Stanley's plans

for an integrated client information system are worthwhile? [Hint: Think of the services

you would like to receive from your banker or stock broker.]

4. Aside from new systems, what changes in management and organization are required

to restore revenue and profit growth at the Global Wealth Management Group?

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CASE II:

If you turn on the television, read a newspaper, or surf the Web, you're bound to find

many dire predictions about large-scale loss of life from biological or chemical attacks or an

avian influenza pandemic. Computer models estimate that between 2 and 100 million people

could die in the event of a flu pandemic, depending on the characteristics of the virus. Fears of

a major public health crisis are greater now than ever before, and governments throughout the

world are trying to improve their capabilities for identifying biochemical attacks or pandemic

outbreaks more rapidly.

On May 3, 2006, the United States government issued an Implementation Plan for its

National Strategy for Pandemic Influenza to improve coordination among federal, state, and

local authorities and the private sector for pandemics and other public health emergencies.

The implementation plan calls for improving mechanisms for real-time clinical surveillance in

acute care settings such as hospital emergency rooms, intensive care units, and laboratories

to provide local, state, and federal public health officials with continuous awareness of the

profile of illness in communities.

One such initiative is the BioSense Real-Time Clinical Connections Program developed

by the U.S. Federal Centers for Disease Control and Prevention (CDC). BioSense sits atop a

hospital's existing information systems, continually gathering and analyzing their data in real

time. Custom software developed by CDC monitors the facility's network traffic and captures

relevant patient records, diagnoses, and prescription information. The data include patient

age, sex, ZIP code of residence, ZIP code of the medical facility handling the patient, the

principal medical complaint, symptoms, onset of illness, diagnoses, medical procedures,

medications prescribed, and laboratory results. The software converts these data to the HL7

data messaging format, which is the standard for the health-care industry, encrypts the data,

and transmits them every 15 minutes over the Web to the CDC where they are maintained in a

large data repository.

The system summarizes and presents analytical results by source, day, and syndrome

for each ZIP code, state, and metropolitan area using maps, graphs, and tables. Registered

state and local public health agencies as well as hospitals and health care providers are

allowed to access data that pertain to their jurisdiction. They access BioSense via a Web-based

application over a secure data network, 'information from BioSense could show early signs of a

pandemic or biologic attack and alert local Hospitals, health workers, and federal and state

agencies to take preventive measures.

The traditional process for public health Surveillance is manual and much slower.

Hospitals, Physicians, and laboratories would mail or fax paper reports to public health

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agencies, who would then call health care providers for more detailed information. This slow

chain of person-to-person communication is not well-suited to a major public health

emergency.

By monitoring streaming data about health events as they occur, the system helps CDC

epidemiologists quickly detect early signs of a flu pandemic or bioterrorist attack and provide

public health and government decision makers with the information needed to manage

preparedness and response, simultaneous access of the data by all levels of public health

decreases the time needed to classify health events as serious public health problems;

decreases the time to identify causes, risk factors, and appropriate interventions; and

decreases the time needed to classify health events as serious public health problems;

decreases the time to identify causes, risk factors, and appropriate interventions; and

decreases the time needed to implement countermeasures and health guidance.

BioSense first became operational in 2004, when it began gathering daily data from U.S.

Defense Department and Veterans Affairs (VA) hospitals and laboratory Corporation of America

(LabCorp) orders Sir medical tests. (LabCorp operates a large nationwide network of testing

locations and service Enters and is one of the largest clinical lab service providers in the United

States.) Approximately 700 defense Department and 1,110 VA facilities report data to

BioSense. In late 2005, CDC started to expand fie BioSense network to civilian hospitals in

major metropolitan areas and anticipates sharing its Analysis of local and regional influenza-

like illness tenders with health care and other public agencies in affected areas. The CDC

expects to connect 300 hospitals to BioSense by the end of 2006.

To help civilian hospital link to BioSense, the CDC enlisted the Consella group health

care information technology consultants. Consella explains the benefits of participating in a

project that will serve their specific interests as well as those of the public at large and will put

their data in standardized form.

However, many hospitals have not been anxious to jump on the bandwagon because

the transition would be burdensome and time-consuming. To transmit data to BioSense, each

hospital must standardize its patients and other medical data. Most hospitals use their own

coding systems for symptoms, diseases, and medications. CDC’s contractors would have to

work with the hospital to translate its data codes into the standards used by CDC’s software.

According to Barry Rhodes, CDC’s associate director for technology and informatics, “To

standardize the data and do all the data validation steps is a huge technological challenge."

Some in the medical community question whether the BioSense network is worth the

effort. whether the BioSense network is worth the effort. "If there is a pandemic flu, we are not

going to know about if from a system like this," says Dr. Susan Fernyak, director of

communicable disease control and prevention at the San Francisco Department of Public

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Health. According to Dr. John Rosenberg, director of the Infectious Disease Laboratory at the

State of California's Department of Health Services in Richmond, California, if an epidemic

broke out, "You'd know it befor the date rolled in. When your emergency rooms fill up you

make a phone call; this is probably a better measure."

David Groves, CDC project head at SAIC, a BioSense contractor, points out that a

hospital's medical staff might not know right away that there's a serious problem when

patients start showing up with symptoms. CDC scientists using the system will be in a better

position to spot a major pandemic or biological or chemical attack over a wider geographic

area. Having a bigger picture of what's happening will help CDC help hospitals, police, and

emergency units mobilize a better response.

Although participation in BioSense is voluntary, physicians and health official might

resent the system because it enables the federal government to encroach on what has

traditionally been the domain of local health care providers and organization. They note that

they and not the CDC have the responsibility for responding to and managing a pandemic.

Additionally, hospitals are reluctant to sign up because of concerns about maintaining privacy

and security of patient information. BioSense would let the CDC "listen in" on their treatment

of patients on a real-time basis. The CDC does not use any data that would identify individual

patients.

CASE II QUESTIONS

1. Describe and diagram the existing process for reporting and identifying major public

health problems, such as a flu pandemic.

2. How does BioSense improve this process? Diagram the process for reporting and

identifying public health problems using BioSense.

3. Discuss the pros and cons of adopting BioSense for public health surveillance. Should all

hospitals and public health agencies switch to BioSense? Why or why not?

4. Put yourself in the role of hospital director at a large urban hospital. Would you support

joining up with the BioSense system? Why or why not? What factors would you want to

take into account before joining?

CASE III

BLOCKBUSTER vs. NETFLIX: WHICH WILL WIN OUT?

When Blockbuster entered the video rental business in 1985, the industry consisted

mostly of independent, mom-and-pop-style stores whose entire reach may have been two

towns or a few city blocks. In its first 20 years of business, the rental giant opened 9, 100

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stores in 25 countries, gaining a market share that has been enjoyed by few companies in any

industry.

Blockbuster equipped each of its video rental stores with custom software it had

designed to simplify rental and sale transactions. An automated point-of-sale system uses a

laser bar code scanner to read data from items being rented or sold and from a Blockbuster

customer's identification card. These data are transmitted to Blockbuster's corporate computer

center. Management uses these data to monitor sales and to analyze the demographics, and

rental and sales patterns for each store to improve its marketing decisions.

Blockbuster's success was based on video tape rentals and sales and rentals of DVDs.

By 2004, Blockbuster possessed a 40-percent share of the U.S. video rental market, estimated

to range from $7 billion of business per year to $9 billion; Blockbuster also had video sales of

around $16 billion.

The greatest threat to Blockbuster's viability came from the emergence of a new

business model in the video rental market. Launched in 1998, Netflix Inc. intended to cater to

those video rental customers who valued convenience above all else. First, the upstart

eliminated the need for a physical store. All interactions between Netflix and its customers

took place on the Internet and through the postal service. Users could go online and create a

wish list of movies they wanted to rent. For a monthly service fee, Netflix mailed up to three

movies at a time, which the customer could keep for a long as he or she wanted without

incurring late charges. When finished with a movie, the customer mailed it back to Netflix in

reshaped packaging provided by the company. Returning a movie prompted Netflix to send the

next title on the customer's wish list. For $19.95 a month, Netflix customers had access to

thousands of movie titles without leaving their homes.

According to Kagan Research LLC, revenues from online movie rentals, which were

basically nonexistent in 1998, rose to $552 million in 2004. Kagan projected that the total

revenue would approach $1 billion in 2005 and $3 billion by 2009. As Netflix caught on and its

subscription model became popular, Netflix's gains in market share, from 2 to 7 percent

between 2003 and 2004, gave Blockbuster true cause for concern.

To compete in the changing marketplace, Blockbuster made some dramatic changes in

its business beginning in 2003. It added an online rental service; Movie Pass, a monthly

subscription service for in-store customers; Game Pass, a subscription service for video games;

a trading service for movies and games; and the infamous "No More Late Fees" program. The

entire question of how to address a new source of competition was a complicated matter.

Blockbuster could have chosen to launch an online rental store similar to Netflix and leave it at

that. Or, the company could have focused only on its traditional business in an attempt to lure

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customers back from the rising online tide. Instead, with the initiatives previously mentioned,

Blockbuster tried to do both.

Blockbuster's $100 million increase in capital expenditures from 2003 to 2004 hints at

the scale of the restructuring of the business. Many of those millions found their way to the

information technology department, which took Netflix on directly by establishing the

information systems supporting Blockbuster's own online subscription service. This venture

required Blockbuster to construct a new business model within its existing operations.

Rather than meld the two channels, Blockbuster created a new online division with its

own offices near corporate headquarters in Dallas. Part of Blockbuster's initial strategy for

defeating the competition was to undercut Netflix in both pricing and distribution. Blockbuster

set the price for its three-movies-at-a-time monthly subscription at $19.99, which was, at the

time, two dollars less than Nexflix's competing plan. Blockbuster had a strategic advantage in

distribution as well. Netflix was serving its customers from 35 distribution centers around the

country. Blockbuster had 30 such facilities but also had 4,500 stores in the United States to

deliver DVDs to most of its customers in only a day or two at lower shipping costs. Blockbuster

also enticed online customers to maintain a relationship with the physical stores by offering

coupons for free in store rentals. Blockbuster's original intent was to integrate the online and in

store services so that customers could float back and forth between the two channels wit

restrictions. However, the disparate requirements for revenue recognition and inventory

management have so far been too complex to make the plan a reality.

After a year in existence, the report card on Blockbuster's online store was mixed. The

service had acquire on million subscribers and the company hoped to double that number

within seven months or so. At the same time, Netflix had surpassed three million subscribers

and was on its way to four million by the end of the year. Blockbuster continued to pursuer

gains through pricing, at one point lowering its three-movie plan to $14.99 per month versus

$17.99 at Netflix. Both companies offer plan variations such as unlimited rentals of one DVD at

a time for $5.99 per month and two at a time with a limit of 4 per month for $11.99.

In September 2005, research firm SG Cowen declared that Blockbuster's online DVD

rental service "remains inferior" to Netflix. The researcher stated that Blockbuster had

improved on movie availability but actually fell further behind in ratings of its use interface.

The evaluation by SG Cowen came on the heels of rocky financial reports for Blockbuster.

Blockbuster's most costly change was likely the "No More Late Fees" campaign it launched in

January 2005. The goal of the program was to lure more customers and position Blockbuster

better in the market alongside Netflix, which never charged late fees. However, the program

may have created more problems than it solved. Blockbuster did measure an increase in in-

store rentals after eliminating late fees, but early returns did not suggest that the increase

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offset the $250 million to $300 million in annual late fee revenue that was no longer being

collected.

Well-known corporate raider Carl Icahn took advantage of Blockbuster's low share price

and acquired 9 percent of the company, entitling him a position on the board of directors.

Icahn harshly criticized CEO John Antico's business strategy. Icahn believed that Blockbuster's

new initiatives such as online rentals, were too expensive and too risky. He believed that the

company should take advantage of its prevailing position in the bricks and mortar rental

industry, even if that industry were slowly dying. Despite the presence of Icahn, Antico

maintained that online rentals were the only segment of the industry open to growth.

Both Blockbuster and Netflix now face a new set of challenges. Fifteen million cable

subscribers use video-on-demand (VOD) technologv to watch movies and programs that are

not yet available on DVD. TiVo and similar digital video recorders combined with VOD could

make the rental of movies obsolete. Some analysts still insist that the economics do not make

sense for movie studios to abandon DVD sales which account for 50 percent of their profits, in

favor of VOD. And technology does not currently permit the bandwidth for VOD suppliers to

provide nearly the number of titles that Blockbuster can. Down the road, however Blockbuster

likely will have to address VOE), especially if the studios can eliminate companies like

Blockbuster as an intermediary.

In April 2006, the Internet as a channel for movie distribution finally came into focus.

Six movie studios, including Warner Brothers, Sony Pictures, Universal, MGM, and Paramount,

reached an agreement with Web site Movielink to sell movies online via download. Until that

time, Movielink had offered movie downloads as rentals, which, like the VOD model the

customer could watch for only 24 hours. Sony, MGM, and Lions Gate also reached agreements

with a Movielink competitor, CinemaNow, which is partially owned by Lions Gate. Warner

Brothers also expanded its presence by-entering into relationships with Guba.com and

BitTorrent. The studios moved to build on the momentum created by the success of the iTunes

music store, which demonstrated that consumers were very willing to pay for legal digital

downloads of copyrighted material. At the same time, they hoped that entering the download

sales market would enable them to confront the piracy issue in their industry earlier in its

development than the music industry was able to do.

While the studios' commitment to these ventures appeared clear, what remained a

question was whether they could replicate the success of iTunes. The initial pricing schemes

certainty did not offer the same appeal as Apple's $0.99 per song or $9.99 per CD. Movielink

set the price for new movies at $20 to $30. Older movies were discounted to $10. Movielink

was counting on the fact that customers would pay more for the immediacy of downloading a

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movie in their homes, as opposed to visiting a bricks-and-mortar store like Circuit City or an

online store such as Amazon.com, both of which sell new DVDs for less than $15.00.

However, even if customers were willing to pay a little extra, they were getting less for

their money. Most movie downloads did not come with the extra features that are common

with DVD releases.

Moreover, the downloaded movies were programmed for convenient viewing on

computer screens, but transporting them from the computer to the TV screen involved a more

complicated process than most consumers were willing to tackle. Neither Movielink nor

CinemaNow offered a movie format that could be burned to a DVD and played on a regular

DVD player. In fact, CinemaNow downloads were limited to use on a single computer. To watch

these movies on a television screen, users would need to have Windows Media Center, which is

designed to connect to a TV or special jacks and cables.

An additional obstacle for both the technology and the consumer to overcome was

bandwidth. Even using a broadband Internet connection, high-quality movie files, which

generally surpassed 1 gigabyte in file size, required in the neighborhood of 90 minutes to

download completely.

Considering these issues, the near-term outlook for the legal digital distribution of

movies remains cloudy, Movielink, with only 75,000 downloads per month, was struggling to

sustain itself. Neither Blockbuster nor Netflix seemed in a panic to adjust to this new source of

competition. While locked in legal battles over patents and antitrust concerns, the two

companies had few specific plans related to downloading, though Netflix was widely believed

to be considering a set-top box. Netflix said only that downloading was part of its future plans,

but expressed dissatisfaction with the terms the movie studios were offering in early

discussions.

The one development that has the potential to force the hands of Blockbuster and

Netflix is the entrance of Apple into the movie download market. Apple's iTunes store, like

Netflix, already had a satisfied and loyal customer base, not to mention a pervasive "cool"

factor. And, it was iTunes's successful transition from music-only to music and television

downloads that paved the way for Movielink and CinemaNow to sell movie downloads in the

first place. Apple is said to be on the verge of adding movies to its store and would stick to its

flat-rate p; icing model. Industry rumors indicated that Apple CEO Steve Jobs intended to sell

downloads of all movies for S9.99. Industry experts characterized Apple's involvement as a

possible "tipping point" for outline movie distribution.

In the meantime, Antico wants Blockbuster to stay very close to the cutting edge of

technology in his industry. Doing so, he believes will enable the company to replace directly

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any rental revenues lost to new technology. Meanwhile, add Amazon to the list of competitive

threats on which Blockbuster must also keep a careful eye. Amazon.com already operates an

online movie rental service in the United Kingdom. Could there be another player to compete

with Blockbuster and Netflix? Or could a new partnership shake up the industry again?

CASE III QUESTIONS

1. What is Blockbuster's business model? How successful has it been?

2. What industry and technology forces have challenged that business model? What

problems have they created?

3. Is Blockbuster developing successful solutions to its problems? Are there other solutions

it should have considered?

4. How successful is Netflix and its business model?

5. Do you think Blockbuster or Netflix will succeed in the future? Explain your answer.

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CASE IV

IS THE TELEPHONE COMPANY VIOLATING YOUR PRIVACY?

In May 2006, USA Today reported that three of the four major United States landline

telecommunications companies had cooperated with the National Security Agency (NSA) fight

against terrorism by turning over records of billions of phone calls made by Americans. AT&T,

Verizon Communications, and BellSouth all contributed to the NSA's anti-terrorism program.

Qwest Communications International was the only one of the big four to withhold its records.

The revelation by USA Today caused a firestorm of controversy. Media outlets, privacy

advocates, and critics of the Bush administration expressed outrage over the program and

questioned its legality. The Washington Post referred to the program as a "massive intrusion

on personal privacy."

The issue received particularly strong scrutiny because it came to light only five months

after President Bush said that he had authorized the NSA to listen in on international phone

calls of Americans suspected of having ties to terrorism without obtaining a warrant. When

combined, the two stories caused intense worn7 among privacy activists who feared that a

widespread data mining effort was being carried out against American citizens by the

administration.

President Bush would not acknowledge the existence of such an initiative. He said only

that, "the intelligence activities I authorized are lawful and have been briefed to appropriate

members of Congress." He added, "We are not mining or trolling through the personal lives of

innocent Americans" and the privacy of citizens was being "fiercely protected."

What exactly did the phone companies do for the government? After September 11,

2001, they began turning over tens of millions of phone call records to the NSA, whose goal

was to build a database of every call made inside the United States. The records that were

turned over contained only phone numbers and calling information such as time, date, and the

duration of the calls; they omitted names, addresses, and other personal data. Qwest was

approached by the NSA at the same time as the others, but Joseph Nacchio, the company's

CEO at the time (later involved in an insider trading scandal), refused to cooperate. Nacchio

based his decision on the fact that the NSA had not secured a warrant or submitted to other

legal processes in requesting the data.

The ethical questions raised by this case prompted no shortage of opinions from

executives, politicians, pundits, activists and legal experts. The phone companies cited a

strong belief in protecting the privacy of their customers but stated that the belief must co-

exist with, an obligation to cooperate with law enforcement and the government in matters of

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national security. A release from AT & T summed up the company's position as follows: "If and

when AT&T is asked to help, we do so strictly within the law and under the most stringent

conditions." Verizon made a similar statement but also declined to comment on having a

connection to a "highly classified" national security plan. The company also indicated that

press coverage of its data dealings contained factual errors.

After examining the issue, legal experts on both sides of it weighed in with their

opinions on the actions taken by the phone companies. Lawmakers began to seek hearings on

the matter almost immediately. Customers directed their anger and concern directly to

customer support lines. Two lawyers in New Jersey filed a S5 billion suit against Verizon on

behalf of the public accusing the company of violating privacy laws.

Some legal scholars and privacy advocates agree that the telecoms may have crossed

the line. These experts cite the Electronic Privacy Act of 1986, which permits businesses to

turn over calling data to the government only in extreme cases (for example, to protect

individuals who are in immediate danger of being harmed). Creating a database from the

records does not meet the criteria. James X. Dempsey of the Center for Democracy and

Technology noted that the law allows for a minimum penalty of $1,000 per customer whose

calling data were submitted to the government. Based on the number of records contributed to

the NSA database, the phone companies faced civil penalties reaching hundreds of millions or

possibly billions of dollars.

Dempsey shot down the idea that the phone companies did not break the law because

the records they turned over included only phone numbers and not identifying information.

According to Dempsey, the law does not specify that such personal information needs to be

exchanged for the law to be broken. This was a popular position among critics of the NSA

program. They asserted that phone numbers could easily be cross-referenced to personal

information, such as names and addresses, using databases that are readily available to the

public on the Internet.

A senior government official who spoke on condition of anonymity admitted that the

NSA had access to most domestic telephone calls even though, according to Kate Martin of the

Center for National Security Studies, the NSA would be prohibited by federal statutes from

obtaining such data without judicial consent. The government official said that the scope of the

program was small in the sense that the database was used only to track the communications

of individuals who were known to have ties to terrorism.

The non-profit Electronic Frontier Foundation (EFF), a privacy watchdog, concurs with

Martin's assessment. EFF supports its argument by referencing the Pen Register Statute, which

prohibits the government from gathering calling data without a court order, and the Fourth

Amendment, which covers privacy rights and unreasonable search and seizure. However, the

14



impact of such a defense in court was unclear. In response to the wiretapping controversy of

five months earlier, the Bush administration cited Article II of the Constitution as the derivation

of its authority to employ wiretapping as a terror-fighting tool. Furthermore, Congress virtually

wrote the President a blank check by empowering him to "use all necessary and appropriate

force" in the war on terror.

It was not surprising that Congress had as much to say about the issue as anyone.

Various senators weighed in both with opinions and calls for investigation. Opinions did not

always fall along party lines.

Senator Dick Durbin, a Democrat from Illinois, believed that actions of the telephone

companies put the privacy of American citizens at stake and that the companies should be

compelled to appear before the Senate Judiciary Committee. Durbin was backed up by the

chairman of that committee, Senator Arlen Specter, a Republican from Pennsylvania. Senator

Specter intended to call upon executives from the Participating companies to give their

testimony about the NSA database program. House Majority Leader John Boehner of Ohio and

Senator Lindsey Graham of South Carolina also crossed party lines in questioning the necessity

of such a program. Senator Graham asked, "The idea of collecting millions of thousands of

phone numbers, how does that fit into following the enemy?"

Proponents of the program answer that question by saying that the purpose of the

program is to discover patterns in the calling records that indicate the presence of terrorist

activity. Intelligence analysts and commercial data miners refer to this as ink analysis, "which

is a technique for pulling meaningful patterns out of massive quantities of rata. Defenders of

the program were harshly critical of media outlets who exposed it. Representative Peter

Hoekstra, a republican from Michigan and chairman of the House Intelligence Committee,

insisted that reporting on the NSA's programs undermined national security. He stated, "Rather

than allow our intelligence professionals to maintain a laser focus on the terrorists, we are

once again retired in a debate about what our intelligence community may or may not be

doing”. President Bush echoed this sentiment by declaring that leaks of sensitive intelligence

always hurt the government's ability to counter terrorism.

Republican Senator Jeff Sessions of Alabama also disputed the need to investigate the

program. Senator Sessions answered the critics by emphasizing"; that the program did not

involve actual surveillance of phone conversations and therefore did not merit the scrutiny it

was receiving. In his statements, the president also went out of his way to distinguish between

eavesdropping on telephone conversations and gathering call data.

In May 2006, senior intelligence officials revealed that the scope of the NSA's

eavesdropping operations was strongly influenced by Vice President Dick Cheney and his

15



office. The Vice President and his key legal adviser, David S. Addington, began pushing for

surveillance of domestic phone calls and e-mails without warrants soon after September 11 th.

They believed that the Constitution gave the executive branch expansive powers that covered

this type of domestic spying, as well as certain interrogation tactics for dealing with suspected

terrorists.

However, the NSA pushed back on advice from its owl legal team. As a result, the NSA limited

the eavesdropping to calls in which at least one participant was outside the United States.

Still, conducting such operations appeared to conflict with the 1978 Foreign Intelligence

Surveillance Act (FISA), which required court authorization for any wiretapping done within the

United Stales. Nancy Libin of the Center for Democracy and technology posits that listening in

on any phone cay without a warrant, regardless of whether it is domestic or international, is

illegal according to FISA. However, while FISA covers wiretapping, it does not clearly prohibit

the type of data mining that was done in the NSA database program.

In June 2006, a federal court in California released a document related to EFF's suit

against AT & T that sheds light on how the phone company may have provided its data to the

NSA. In the document, J. Scott Marcus, who had worked as a senior advisor for Internet

technology to the Federal Communications Commission, evaluates evidence presented to EFF

from a former AT & T technician named Mark Klein. Klein claimed that AT&T recon figured its

network in San Francisco and installed special computer systems in a secret room in order to

divert and collect Internet traffic for use by the NSA. Marcus concluded that Klein's description

of a private backbone network partitioned from AT & T's main Internet backbone was "not

consistent with normal AT & T practice”. Marcus further observed that at the time of the

reconfiguration, AT & T was in poor shape financially and would have been very unlikely to

have made such expensive infrastructure changes on its own.

In July 2006, Senator Specter announced that an agreement had been reached with the

White House to give the Foreign Intelligence Surveillance Court the authority to review the

constitutionality of the NSA's surveillance programs. The court would be empowered to

determine whether wiretapping fell within the president's powers to fight the war on terrorism.

The agreement allowed for the court's proceedings and rulings to be conducted in secret. Even

though judicial oversight of the NSA's activities had been established, debate continued over

the efficacy of the compromise. The American Civil Liberties Union and the ranking democrat

on the House Intelligence Committee, Representative Jane Harman of California, accused

Senator Specter of giving away too much, including a key Fourth Amendment protection.

The White House won several important points in the agreement, including the ability to

appeal the court's decisions; changing the language so that submitting a program to the court

was actually optional for the administration; and a guarantee that the agreement doe's not

16



retract any of the president's existing constitutional authority. On the other hand the lead

judge on the court was known to have significant misgivings about the NSA's actions ever

before the program came to light. The bill to enact FISA's power over NSA wiretapping awaits

Congressional approval.

CASE IV QUESTIONS

1. Do the increased surveillance power and capability of the U.S. government present an

ethical dilemma? Explain your answer.

2. Apply an ethical analysis to the issue of the U.8 government's use of

telecommunications data to fight terrorism.

3. What are the ethical, social, and political issues raised by the U.S. government creating

massive databases to collect the calling data of millions of Americans?

4. What is the responsibility of a business such as AT & T or Verizon in this Matter? What

are the ethical, social, and political issues raised by a business, such as a phone

company, working with the government in this fashion?

5. State your opinion of the agreement reached by the White House and the Senate

Judiciary Committee with regard to the NSA wiretapping program. Is this an effective

solution?

17



CASE V

Merrill Lynch Connects Past and Future Technology

Merrill Lynch is a worldwide leader in-;'financial management and advisory services,

employing 50,600 workers 36 countries and territories. The company and its subsidiaries

provide brokerage, investment banking, financing, wealth management, advisory, asset

management, insurance, lending, and other related products and services to private,

institutional and government clients with assets of $1.6 trillion'' In 2005, Merrill Lynch posted a

record S5.1 billion net earnings, a 15 percent increase over the previous year, on net revenues

of $26 billion.

One of the most critical components of Merrill, Lynch's operations is its information

technology infrastructure. Over the last five years, that IT infrastructure has played a major

role in the company gains. Like many financial institutions, Merrill Lynch has had to modernize

its technology infrastructure order to remain competitive.

Merrill Lynch considered its IBM mainframe installation, which was one of the largest in

the world, to be a strategic asset. The mainframe ran in the neighborhood of 23,000 programs

to process the firm's 80 million daily online transactions for accessing customer accounts

online or making stock trades.

In modernizing its technology, Merrill Lynch had to make choices regarding its legacy

computers and applications. Internet-based applications that gave customers access to their

portfolios and tools to work with them were a key to remaining competitive. But these

applications did not use mainframe-based software. How could Merrill Lynch develop such

applications while leveraging the processing power and wealth of data in its mainframe?

The answer appeared to be Web services and a service-oriented architecture (SOA).

Most corporations developing a SOA typically use commercially available platforms such as

those from BEA Systems and webMethods instead of creating their own development

platforms. They rely on the vendor's expertise and access to consultants familiar with

integrating mainframe and Web applications.

Project leader Jim Crew, then head of database infrastructure for Merrill Lynch,

determined that on the surface, purchasing an SOA platform was much easier than building

one, and would have enabled the firm to deploy its Web services relatively quickly However,

no SOA vendors that Crew researched offered products that met Crew's requirements for the

project. They were offering SOA platforms that were geared toward distributed programming

and recent development tools such as Java and .NET.

18



Merrill Lynch's 1200 mainframe programmers did not have experience with these tools.

Retraining this huge staff did not make sense economically, nor did purchasing new

workstations required for running the development software. According to research from

Gartner Group consultants. retraining Merrill Lynch's mainframe programmers could have

taken as much as a year and cost more than $80 million. To Crew, it was obvious that the firm

should pursue a more unconventional approach; construct a proprietary Web development

platform from the ground up to extend the capabilities of its legacy mainframe systems.

Merrill Lynch had initially tried to avoid these costs by copying the data stored in its

mainframe installation into Oracle, Sybase, or Microsoft SQL Server databases. In those

formats, the data were compatible with server-based applications. However, that technique

was not entirely satisfactory. Copying large quantities of data often introduces errors based on

disk failures and space issues. Furthermore, some data can become obsolete as soon as they

are copied. For instance, a client who made several stock trades would have to wait until the

next day to see an accurate balance in his or her account. Crew noted that the firm was

spending money on copying data that could quickly be out-of-date while the accurate data

were always residing on the mainframe.

Instead, Merrill Lynch created its own set of in-house proprietary tools that enable its

mainframe legacy programs and the functions they perform to be exposed as Web services.

XML tags are used to describe the data for other applications that are equipped to interpret

XML. SOAP makes it possible for programs running under different operating systems to

communicate with each other. Together, the two standards made it possible for online

applications to communicate effectively with the mainframe without an additional layer of

middleware.

Merrill Lynch's Web services toolset -was called X4ML, which stood for XML for

Modernizing Legacy. Crew challenged his team to increase the firm's savings from Web

services ten-fold to $20 million. Crew's team established five criteria for the Web services

project:

1. No new programming languages for the mainframe programmers to learn.

2. No new software tools for development that would require expensive workstations;

tools would be accessible from a Web browser.

3. A central storage directory for the Web services that would be developed so that

programmers could easily reuse and repackage them with each other.

19



4. Web services developed as a result of the project had to conform to the existing main-

frame security standards as well as Web security standards for encryption,

authentication, and authorization.

5. Inclusion of budding Web services standards in the Web services architecture to ensure

future availability.

The project team prohibited the new platform from requiring changes to program code

on the mainframe or hindering its operation in any respect. The team did not want to alter the

mainframe in any way because of its track record, its complexity, and the fact that there was

likely no one on staff who knew the inner workings of its deep-rooted code.

To maximize simplicity and speed, the team did not install a middleware server to

translate requests made to it in other languages, such as Java, into instructions that could be

understood by the mainframe applications. Instead, the translation software was written in

Assembly Language (a programming language dating to the 1950s that is rarely used today for

business applications) and installed directly on the mainframe This strategy reduced the

number of things that could go wrong during translations and promised better performance.

The lack of middleware meant that the system's users such as Merrill Lynch financial

advisers, could "•quest information directly from the mainframe from their desktops. For

example, an adviser could a Web browser to request a list of all clients who owned shares of

certain stock, such as General Electric (GE). The request arrives at the mainframe to perform a

particular operation, and the search is translated by XML.

A Merrill Lynch mainframe programmer can access the X4ML development tool from a

desktop Web browser. Using X4ML, the programmer can create and name a new Web service,

import the necessary application from the mainframe, and then pick and choose which parts of

the operation in the legacy application to include in the Web service. Thus, a programmer is

able to produce a Web service that pulls out all of the personal data for a client, or copy the

less sensitive data, such as name and address. Once a programmer creates a Web service, it

is, listed in a Universal Description, Discovery, and Integration (UDDI) directory, where it can

be accessed by other programmers. The X4ML development tool also includes a testing

capability, which enables programmers to correct errors before deploying a service, as well as

utilize trial-and-error to perfect combinations of applications for new services.

Merrill Lynch earmarked $1 billion over a three-year period to use X4ML to provide its

14,000 financial advisers with a new suite of wealth management applications. For this

initiative, the firm teamed with Thomson Financial and Siebel Systems (now owned by Oracle),

which offered financial data and research services and client management expertise,

respectively.

20



Merrill Lynch's investment in Web services saved the company S41 million in

application development costs. The company wrung even more value out of X4ML by selling it

in December 2005 to Web services vendor SOA Software Inc. of Los Angeles. As part of the

deal, Crew and three other key members of the X4ML team shifted their employment to SOA

Software to continue enhancing the tool, which was renamed Service Oriented Legacy

Architecture (SOLA). Merrill Lynch had a long history of selling internally developed technology,

and it viewed the sale of X4ML as a way of optimizing its investment.

Chief Technology Architect Andrew Brown did not think that turning the technology over

to another company would hurt his firm's competitive advantage. He needed six months to

convince management that selling to a software vendor was the right move. After the fact,

management appreciated the value of the sale and the space that it created in the IT budget.

At the time of the sale, X4ML was utilizing 600 Web services for 40 different core applications

at Merrill Lynch and processing 1.5 million transactions daily. The price of the X4ML sale to

SOA was not disclosed, but SOA Software began selling SOLA to customers in 2006 for

$125,000. Purchasers of the tool were poised to gain unmatched scalability. Meanwhile, the

success of X4ML gave a second life to Merrill Lynch's mainframe programmers and their work.

CASE V QUESTIONS

1. Why did Merrill Lynch need to update its infrastructure?

2. What is the relationship of information technology to Merrill Lynch's business strategy?

How was its Web services initiative related to that strategy?

3. Evaluate Merrill Lynch's approach to Web services development. What are the

advantages and disadvantages? Is it a good solution? Explain your answer.

4. Do you think that Merrill Lynch's decision to sell off its successful technology initiatives

was a good idea? Why or why not?

21



Case VI

PANASONIC CREATES A SINGLE VERSION OF THE TRUTH FROM ITS DATA

Panasonic is one of the world's leading electronics manufacturers. It operates under the

auspices of parent company Matsushita Electric Industrial Co. Ltd., a conglomeration of over

600 firms that is based in Kadoma, Japan. Collectively, the businesses of Matsushita

manufacture 15,000 products for a global market and employ 330,000 people internationally.

In Europe alone, Panasonic has 15 sales subsidiaries, 14 manufacturing facilities, five research

and development centers, and seven administrative stations. Add in major presences around

the world, including Asia and North America, and it is clear that Panasonic's operations cover

the globe.

With so many different sources of data, the company found itself with product and

customer data that were often inconsistent, duplicate, or incomplete. Different segments of

the company used their own pools of data, which were completely isolated from the data that

the rest of the company was using. These conditions combined to be a drag on operational

efficiency and drained significant amounts of money from the corporation as a whole.

The types of data required to launch a new Panasonic product included photos, product

specifications and descriptions, manuals, pricing data, and point-of-sale marketing information.

Employees adapted product information to suit the needs of their country or region. It took

considerable time and effort to sift through all the data and create a common set of data for

launching products globally, which allowed competitors to infiltrate markets that Panasonic did

not reach in its first phase of a launch.

To solve this problem, Panasonic decided to pursue a "single version of the truth." Daily

activities required the data to pass though legacy systems, fax machines, e-mail, phone calls,

and regular mail. With so man}' people handling the data in such a variety of formats,

inefficiencies and inaccuracies were always a risk. Erasing these problems promised to

increase Panasonic's speed of bringing products to market.

Panasonic was enjoying a number of successes: a market leadership in plasma TVs, a

successful transition of company presidents, and a well-received marketing identity,

"Panasonic: Ideas for Life." However, these positives were overshadowed by the administrative

costs incurred by such an immense organization. Thus, when Fumio Otsubo took over as

president in June 2006, he took over a y company with an operating profit margin of only 5

percent. The board of directors saddled him with the goal of increasing the margin to 10

percent by 2010.

In Panasonic's industry, consumers expect the price of new technology to decrease over

time, which it had for items that were strengths at Panasonic such as plasma TVs and DVD

22



players. Therefore, Otsubo could not expect to increase the company's profit margin by

increasing prices. Instead, he had to set his sights on reducing costs and increasing sales.

Starting in Europe, Panasonic sought to replace its "pull" model of data dissemination

with a "push" model. Previously, employees in marketing and sales had to request data from

numerous repositories. Under the push model, a centralized data bank sends the information

to all employees who need it at the same time, ensuring uniformity. The recipients of p the

data include retail partners and e-commerce vendors, who receive complete product

information at all stages of a product rollout. Panasonic employees receive data on a more

targeted basis. The benefits to Panasonic Europe are more consistent product rollouts and

product information. The latter ensures that customers do not become confused while

researching their purchases, which could motivate them to abandon Panasonic for a

competitor.

The technical force behind Panasonic Europe's data management overhaul was master-

data-management (MDM) software from IBM's WebSphere line. The software enabled

Panasonic Europe to consolidate date data, as well as systematize the business processes

related to the data. Overall, the company gained better control over its internal data.

Generally speaking, MDM software aims to merge disparate records into one

authenticated master file. Many companies have adopted MDM to fix discrepancies among the

databases used by their various departments (e.g., the accounting department having record

of fewer customers than the number of customer IDs in the CRM database). MDM is particularly

useful for companies that have data integration issues as a result of mergers or acquisitions.

Small and mid-size firms generally do not have the kinds of challenges that would require an

MDM solution.

Implementing MDM is a multi-step process that "includes business process analysis,

data assessment, data cleansing, data consolidation and reconciliation, data migration, and

development of a master data is service layer. These steps produce a system of records that

stores the master file for all of the company's data. It is critical for the organization to institute

strict policies against computing activities that could compromise the authenticity of the data.

Once -the MDM is in place, employees and applications access a consolidated view of the

company's data. The implementation should enforce standards for the formatting and storage

of data, such as the num- her of fields in an address record or the number of digits in a ZIP

code. The service layer of the MDM preserves the view of the master data for applications and

synchronizes updates to the master file.

In the case of Panasonic, the deployment of the IBM MDM software paid quick

dividends. Within a year and a half, Panasonic Europe was getting products to market faster

23



and spending 50 percent less time creating and maintaining product information. Time-to-

market for a product was reduced from five to six months to one to two months. According to

internal calculations, Panasonic Europe improved its efficiency by a factor of 5 and anticipates

saving a million euros a year while increasing sales by 3.5 percent.

However, analyst Paul Jackson of Forrester Inc., cautioned against high expectations of

boosted sales based on data management improvements. He pointed to pricing, innovation,

and strategic partnerships as better strategies for long-term market share increases.

When Panasonic North America had to reconcile its data, it did not have to confront the

challenge of multiple countries with multiple languages and currencies complicating product

launches, as had its European counterpart. However, the challenges of reorganizing workflow

and consolidating product information were just as daunting.

Panasonic faced this issue when it needed to provide a consolidated view of product

information for retail giant Wal-Mart. Panasonic started by identifying the information that Wal-

Mart would need, which was data that adhered closely to industry standards. Then, the

electronics maker searched its legacy systems for the sources of the required data. Finally,

Panasonic worked with IBM to create an interface apparatus to collect the required data for a

repository. Some information, such as that produced by newer business processes, was not

available in the legacy systems. Panasonic had to add new interfaces in order to include this

information and then build an application-integration layer to send the whole package to Wal-

Mart.

Each of the company's multiple facilities made its own contributions to new products.

More importantly, the facilities had their own cultures and information infrastructures. They

also valued their autonomy and the flexibility it furnished. Different Panasonic entities might

be unwilling to give up control over information due to the perceived loss of power. The

company required clear music management rules to prevent too many hands from

manipulating the data so that the master would remain pristine. Panasonic North America

Information Technology vice president Bob Schwartz hoped that the tierce competition

threatening the standing of his company would help convince the traditionalists to support

data-sharing. However, he expected that convincing the enterprise of this would be an uphill

battle.

Besides all the units of Panasonic North America, there were manufacturing partners to

briny aboard. Without them, the system could not fulfill its complete potential. This had been a

serious challenge for Panasonic Europe, where most partners were based in Asia and were

content with their manual processes for managing product data Paul Bolton, senior manager

for e-commerce and customer relationship management solutions deployed the product

24



information database at Panasonic first. Once it proved effective, he then presented its

capabilities to the other manufacturers and won them over.

Schwartz therefore had a strategy and a roadmap to clear that hurdle. What remained

was perhaps the biggest hurdle; convincing the corporate office in Japan that their data

management strategy deserved global adoption. Only then would the application of MDM

principles achieve its full benefit. In the meantime, Schwartz reached out to Panasonic's

vendors in the U.S. and gained additional profits from the company's improved data. Panasonic

was able to use the data to reduce the amount of time that vendors such as Best Buy and

Circuit City kept high-cost inventory, such as large-model TVs, in stock from 35 to 7 days,

thereby increasing their profit margins.

CASE VI QUESTIONS:

1. Evaluate Panasonic’s business strategy using the competitive forces and

value chain models.

2. How did Panasonic’s information management problems affect its business

performance and ability to execute its strategy? What management,

organization and technology factors were responsible for those problems?

3. How did master data management address these problems? How effective

was this solution?

4. What challenges did Panasonic face in implementing this solution?

25

mis

Documents

mis max marks

senate judiciary committee

classify health events

political issues raised

public health surveillance

house intelligence committee

end tax reports

video rental market